QuantumScape (NYSE:QS) a development stage company focusing on the commercialization of solid-state batteries for the EV industry would like to put away as quickly as possible its stock price performance in 2021.
At the close of the U.S. stock market on Dec. 20, 2020, QS stock price of $23.67 had losses of approximately 73%. In the last month losses were about 32%. There is something wrong with this pre-revenue publicly traded company. Some crucial factors have made this stock be out of favor in a hot EV industry for most of 2021.
It may be tempting now to think that such now a selloff presents a bargain, a great investment opportunity, a stock idea not to be missed. As always, each coin has two sides. If you run a stock screener and search for stocks that have declined more than 70% in 2021 then QS stock should be on your list.
This search is oriented towards bottom fishing, a very promising investment philosophy but very risky too. I have covered QuantumScape in late summer and was not optimistic at all, as my title was “QuantumScape Has a Promising Idea, But Not Much Else Just Yet.”
Is QS Stock More Than A Promising Idea Now?
In my late Aug. 2021 article, I discussed the key advantages of solid-state batteries compared to lithium-ion batteries. The most notable advantages are safety, smaller size, and effectiveness. The most important disadvantage is that still manufacturing solid-state batteries at a large scale is not feasible. QuantumScape’s CEO Jagdeep Singh has agreed that this disadvantage is a major drawback.
Commenting on the business outlook of the firm for the next seven years until 2028, I considered it very optimistic, and unrealistic. QuantumScape has no revenue yet, but it expects to generate $14 million of revenue in FY 2024 and then explode this growth to a massive $6.4 billion of revenue in FY 2028.
It is no surprise that based on revenue generated, a technology that is unknown to deliver plausible results, and business model projections that seem extremely optimistic, I concluded that its valuation then does not make it attractive.
Could it be that with no product yet to commercialize QS stock is now a hot stock to buy at a discount? I do not think so. I have three arguments for my analysis.
Emotional Trading Should Be Tougher In 2022
Words and meanings such as game-changer, pioneer, disruptor, revolutionize an industry is powerful. They should be backed up with credible results though to keep the momentum sustainable.
QuantumScape’s bulls consider it a company whose technology will reshape the future of the EV industry and solve one of the biggest problems of electric vehicles, a large amount of time it is required to charge them, and their efficiency measured in autonomy after numerous charging-discharging cycles have been completed.
In 2022 higher interest rates are widely expected which will increase the discount rate used to calculate the intrinsic value of all stocks. Simply put, growth stocks now trading at lofty prices and unprofitable companies like QuantumScape will be among those that investors will think twice compared to 2021 before buying.
I dare to predict that the “meme stock” party witnessed in 2021 should end in 2022. A return to placing valuations, growth, and not hypothetical financial results on top of investment analysis and stock picks will make the stock market healthier. Is the idea of waiting for FY 2024 to generate revenue appealing to consider QS stock as attractive now? I do not believe so.
Aligning Management Incentives with Shareholders’ Goals
News that “CEO of Battery Startup Awarded ‘Staggering’ Elon Musk-Like Pay Package,” I consider to be both bullish and bearish and mixed for sure. I like the idea to grant stock options to the CEO valued at a couple of billion so that the company meets various milestones. If achieved, then the shareholders should benefit.
Why am I bearish? These stock options signal to me the current condition of QuantumScape. It is a condition that I would phrase as “let us do whatever it takes because time is ticking and we must generate very soon some revenue, we cannot burn cash forever.” This point brings me to my final argument. The fundamentals.
Data from Simply Wall Street shows several key risks now for QuantumScape. Zero revenue, profitability is not expected to occur over the next three years, significant insider selling in the past three months, and lastly, stock dilution as total shares outstanding grew by 16.4% in the past year.
Is the future of solid-state enough to buy QS stock now? It is promising but highly uncertain. I choose cold facts now rather than bold financial projections. QuantumScape remains a very speculative stock with very high expectations. I expect 2022 to be a very challenging year for stocks. In this scenario QS stock may face hard times. I continue not to like it.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.